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StoxPlus: Foreign Ownership Limit Still Constrains M&A in Vietnam Logistics Sector

Share this on Aug 28, 2017 11:33:56

StoxPlus: Foreign Ownership Limit Still Constrains M&A in Vietnam Logistics Sector

Given strong economic activities, good transportation demand has increased rapidly and outpaced domestic logistics capacity, creating huge gap to tap on for both domestic and foreign players.


Huge potentials in Vietnam logistics sector to tap on

According to StoxPlus’s Vietnam Logistics Market 2016, Vietnam total logistics cost reached US$38.85bn in 2015, equivalent to 20.8% of total GDP. Given strong economic activities, good transportation demand has increased rapidly and outpaced domestic logistics capacity, creating huge gap to tap on for both domestic and foreign players.

Particularly, Vietnam has maintained its relatively high GDP growth of over 5% during the last five years. Vietnam’s stable economic growth rate and population size of over 90 million people, coupled with rising income levels, provide an attractive backdrop for development of the retail industry, driving the potential for logistics sector. It is noted that retail (FMCG) industry accounted for 90% 3PL service demand in 2015.

In 2016, total trade value reached US$350 billion, posting a growth rate of 7% compared to the previous year. Logistics demand from import & export activities is expected to boost with several free trade agreements (FTAs) including Vietnam-Korean Free Trade Agreement (VKFTA), ASEAN Economic Community (AEC).

In addition, Vietnam has become a popular production base for many Japanese and South Korean manufacturers, including big names like Samsung, Panasonic, and Bridgestone in recent years. A combination of a variety of tax incentives and lower labor costs than in other countries have made Vietnam more attractive to foreign manufacturers, as well as their associated suppliers and supporting industries. In fact, total registered FDI into Vietnam hit the record high at US$24.4bn in 2016, equivalent to an annual increase by 9%. The expansion of the multinationals in Vietnam is creating a growing demand for supply-chain management facilities, particularly with regard to handling complex sourcing issues, production requirements and servicing sales networks.

The Government to act on facilitating foreign investment in logistics sector

The Government appears to take action to support logistics sector, especially facilitating capital inflows into Vietnam based on four pillars, including (i) simplification of customs procedures and professional management, (ii) enhancement of trade infrastructure capacity and connection quality, (iii) development of a competitive logistics sector, and (iv) increase of coordination between Government agencies and businesses.

Under Vietnam’s WTO commitments, as of January 1st 2014, foreign ownership limit (FOL) is loosened for a number of subsectors including storage, freight forwarding services, distribution and express delivery with maximum of 100% foreign ownership. In other words, except for container handling and domestic transportation (marine, road, waterway, rail), it no longer requires foreign investors to establish a joint venture with local partners.

Table 1: Foreign Ownership Limit (FOL) in Vietnam Logistics Sector

CPC

SERVICE DESCRIPTION

MAX. FOL

742

Storage and Warehouse

100%

748

Freight transport agency (incl. freight forwarding services)

100%

No CPC

Container station and depot

100%

7512

Courier (express delivery)

100%

621, 622, 631, 632

Distribution (import/export, commission agents, wholesale, retail)

100%

749

Bill auditing; freight brokerage; freight inspection, weighing and sampling; freight receiving and acceptance; transportation document preparation on behalf of cargo owners

99%

No CPC

Custom clearance

99%

7212

Maritime transport (Freight; less cabotage)

51%

7123

Road transport (Freight)

51%

7411

Container handling (except at airports)

50%

7222

Internal waterways transport (Freight)

49%

7112

Rail transport (Freight)

49%

Source: StoxPlus

Foreign Ownership Limit Still Constrains M&A in Vietnam Logistics Sector

Realizing the growing and increasingly liberal logistics market, many global logistics companies have strengthened their presence in Vietnam. Particularly, Germany’s Hapag-Lloyd and Germany’s DB Schenker successful acquired stake in joint ventures with local partners to become 100% FDI companies in 2012 and 2014, respectively.

Table 2: Significant Inbound M&A Deals in Vietnam Logistics Sector

DATE

ACQUIROR NAME

TARGET COMPANY

ACQUIRED

VALUE (US$mn)

May-2017

Mekong Capital - MEF III

Nhat Tin Logistics

Undisclosed

Undisclosed

Dec-2016

SG Holdings Co., Ltd

Phat Loc Express

80.0%

25.0

Mar-2016

Bravia Capital Hong Kong Ltd

Bac Ky Investment

49.0%

Undisclosed

Aug-2016

Mekong Capital - MEF III

ABA Cooltrans

Undisclosed

Undisclosed

Sep-2016

Shibusawa Warehouse

VINAFCO

9.8%

Undisclosed

Jul-2015

Franklin Templeton

INDO-TRANS Logistics

5.0%

15.8

Nov-2014

Shibusawa Warehouse

VINAFCO

35.1%

Undisclosed

Mar-2014

DB Schenker

Schenker-Gemadept Logistics

49.0%

Undisclosed

Jan-2013

Kerry Logistics Network Ltd

Tin Thanh Express

100.0%

Undisclosed

Jan-2012

Hapag - Lloyd Aktiengesellschaft

Hapag - Lloyd Vietnam JV /VNL

49.0%

Undisclosed

Source: StoxPlus

Other remarkable M&A deals in Vietnam logistics sector include Bravia’s acquiring 49.0% stakes in Bac Ky Investment (2016), SG Holdding ‘s purchase of 80.0% stake in Phat Loc Express (2016) and Shibusawa Warehouse’s acquisition of 35.1% stake in VINAFCO in November 2014 and then the buyer increased their stake to 44.9% in September 2016.

Many other local firms are also on the radar for foreign firms. Particularly, in mid-May, Korean (Republic) conglomerate Taekwang Group issued a statement declaring its intent to acquire Gemadept, Vietnam’s largest logistics and port operations firm. Upon Gemadept’s completion of the private offering to convert the loans held by VIG Fund, the Ho Chi Minh City Stock Exchange-listed company is valued at VND12.5 trillion (US$550mn), with foreign investors holding 49.0% and domestic shareholders accounting for the remaining 51.0%. If the acquisition is successful, Taekwang expects to create synergy between its existing manufacturing plants and Gemadept’s logistics network.

Despite strong interest from foreign investors, Vietnam logistics sector recorded a relatively small number of M&A deals compared to other sectors, for instance: Food & Beverage, Real Estate and Construction, which could be explained by three main reasons including legal constraint, fragmented market and local investors’ high expectation in term of valuation.

Foreign ownership limit at 49% is still applicable for domestic transportation as shown in Table 1. In fact, logistics companies in Vietnam are engaged in a wide range of business lines including warehousing, transportation, forwarding. Hence, foreign investors are not permitted to acquire the majority share if the target company is involved in transportation.

Vietnam is home to over 1,300 logistics service providers. Of which, 70% are small, family-run businesses, providing low-added value asset-based services (1PL) or contract logistics providers (2PL). Except for some big names (VINAFCO, Gemadept, Bac Ky, INDO-TRANS), local firms are small and medium-sized with the annual net sales of less than US$10mn, which is not sizable in the view of foreign investors.

Table 3: Top Local Logistics Companies in Vietnam

NAME

FOREIGN OWNERSHIP

(Dec 2016)

NET SALES 2016

VINALINES LOGISTICS VIETNAM

0.0%

˃ US$100mn

GEMADEPT COPORATION

29.9%

˃ US$100mn

VINAFRIEGHT

3.7%

US$50-100mn

INDO-TRANS LOGISTICS

0.0%

US$50-100mn

BAC KY

49.0%

US$50-100mn

SOUTH LOGISTICS (SOTRANS)

0.2%

US$50-100mn

VINAFCO

44.9%

US$25-50mn

TAN CANG LOGISTICS

14.2%

US$25-50mn

SEA & AIR FREIGHT INTERNATIONAL (SAFI)

32.6%

US$25-50mn

DRAGON LOGISTICS (DRACO)

25.0%

US$25-50mn

Source: StoxPlus

In addition, local players expect a relatively high enterprise valuation of approximately 10-15x EBITDA, according to StoxPlus’s M&A database, which is much higher than 7-8x EBITDA in other countries. Hence, the number of M&A deals during the recent period is quite moderate compared to market potential and demand

Download full report

Source: StoxPlus